A home inspection contingency is generally recommended for all homebuyers. With a home inspection contingency, you get to thoroughly examine what could be wrong with the home before closing escrow.
Perhaps just as important, a home inspection contingency enables you to back out of a deal if you find something you don’t like. It’s like a get out of jail free card. At the very least, you can use the home inspection to knock down the asking price.
There’s just one problem. In a competitive real estate market, putting in a home inspection contingency is often a deal killer. Sellers want as few contingencies as possible, which often includes waving the financing contingency. The fewer the contingencies, usually, the stronger the buyer. And the stronger the buyer, usually, the higher the chance a deal will go through.
In my price concession letter post, I had written that I had waived home inspection contingencies for my last two property purchases. Come to think of it, I waived the home inspection contingency for the fixer I purchased in 2014 as well. As a fixer, I already had the intention of gut remodeling the home.
Let me share why I waived the contingency and why you might be OK waiving it too.
Why Waive The Home Inspection Contingency
Here are the main reasons why you would waive the home inspection contingency:
1) You’re trying to buy a home in a strong housing market
2) You’re an experienced real estate investor
3) You have remodeled many times before
4) You have a contractor who will inspect the home before you make an offer
5) You want to save on the home inspection fee
Homebuyers Have Plenty Of Time To Inspect The House
Even in a hot real estate market, homebuyers usually have at least two weeks to inspect a house. There are usually a couple of brokers tours and two weekend open houses before an offer date is set. According to Zillow, a house spent an average of 25 days on the market in 2020 and 2021.
In a regular housing market, the average house can easily stay on the market for 45-60 days. And in a soft housing market, houses can sit for years. Therefore, you usually have ample time to inspect the home you’re considering purchasing.
You can easily visit a house five or six times in a two-week period. The first visit can simply be you checking things out on your own. If you like the house, you can set up a private visit with you and your contractor, handyman, experienced remodeler, partner, etc. The more people you can bring to the open house to look for things, the better.
If you want, you can even pay a professional inspector to do a walk-through with you as well during the open houses. The listing agent should be OK with this since he wants the most serious buyers. Further, a listing agent can’t discriminate against who can come to the open house.
A buyer who is thorough before making an offer will usually throw up fewer surprises during escrow. Therefore, their offers should be more attractive since they have a greater chance of completing escrow.
The Difference Between Inspecting A House Before And During Escrow
One misconception potential homebuyers might have is that there is a big difference between inspecting a house before escrow and during escrow. The reality is, there’s not much difference at all.
There are no secret areas a home inspector gets to unlock after you get into escrow. Nor can home inspectors start opening up walls unilaterally without permission.
A home inspection consists of:
- Checking for leaks, dry rot, mold, and stains
- Inspecting the roof, windows, drywall, plumbing (copper or lead pipes), electrical (knob and tube or Romex wiring), fireplaces, appliances, faucets, sinks, floors
- Making sure the house is up to code and pointing out areas where the house is not
- Examining the foundation for any structural issues and excessive settling issues
- Providing an estimate on the cost of fixing and updating certain things
- Highlighting damaged areas that may have been covered up that may need more investigating
The home inspector is basically trying to find anything wrong with the house that needs repair or updating. If you’ve ever remodeled a home, you will have a keen eye for what to look for.
Waiving A Home Inspection Is Still A Gamble
If you believe your offer still has a chance of being accepted with a home inspection contingency, then, by all means, put one in. Having a home inspection contingency for a large purchase is the responsible thing to do.
If you waive a home inspection contingency, you’re taking a greater risk that some unforeseen costly or dangerous issue might pop up after your purchase. If you don’t have a home inspection contingency or financing contingency and back out, you may lose your 3% earnest money deposit. Therefore, your offer price must take into consideration potential surprise costs.
In a bull market, it’s easier to waive the home inspection contingency because chances are higher the home will continue to appreciate. Therefore, any surprise costs that come up can be more easily digested.
In a bear market, it’s better to have a home inspection contingency because you want an out or a bargaining chip in case you find some issues you don’t like. Further, there’s a much greater chance a home inspection contingency will be accepted in a soft housing market.
You may also want a home inspection contingency on older houses and brand new houses. Brand new houses, like brand new model cars, often have unforeseen issues because the house hasn’t yet been battle-tested through the years yet. For example, who really knows the roof won’t leak yet if it hasn’t been through a major rainstorm?
The reality is, buying anything is a gamble. You just have to determine how much more risk you are willing to take by not going through with an inspection. It’s the same thing as going through life without the various types of insurance policies.
Putting In A Home Inspection Contingency Could Make You Poorer
Almost everything within a home is fixable. You can even tear it down and start over if you want to. You just need to make sure your offer price has some buffer to account for any surprise costs. And part of making a good offer price is understanding how much things cost, e.g. rewiring a house, changing plumbing, moving walls, painting, foundation work, building a master bathroom, etc.
However, if you miss out on a home purchase due to the seller rejecting your offer with a home inspection contingency, you could end up missing out on tremendous upside.
In 2021, alone, the national median home price was up around 18%. We’re talking ~$65,000 of missed home equity upside. If home prices rise another 8% – 10%, as I predict in 2022, then we’re talking an additional $30,000 – $40,000 of missed home equity upside.
If I had not waived my home inspection contingencies on my last three home purchases, I would not have been able to buy them. I faced competing buyers in all three cases who didn’t have home inspection contingencies. Further, some were all-cash buyers.
Based on how home prices have performed since 2014, I would be poorer today if I had not gone ahead with the purchases. Of course, there are no guarantees of increased appreciation after purchase. Prices could have easily gone down as well.
Before making an offer, you need to thoroughly read all the disclosure documents to understand any issues that have come up with the house in the past. The disclosure documents should also highlight any potential liens, easements, and neighborhood issues. A responsible seller should have all documentation about any major repairs.
Personally, I keep a spreadsheet with all money spent on repairs and improvements. This way, I can easily use some of the appropriate costs to increase my cost basis to lower my capital gains tax liability if I were to sell.
As a buyer, I love receiving a detailed spreadsheet with invoices for all remodeling and repair work. It shows me the seller is meticulous about upkeep. It also gives me peace of mind that various things have been fixed over the years.
The more detailed the disclosure statement, the more at ease you should be about not doing a home inspection. With every job done, there should have been a licensed professional doing the work. And most licensed professionals are looking to do more work once they get to your home.
If you have a disclosure statement with not a lot of information, then you should feel less at ease about not doing a home inspection. Sure, the house could really be maintenance-free. However, you just never know.
Home Insurance To Protect Against The Unknown
If you buy a home with a mortgage, you will be required to get homeowner’s insurance. Therefore, your homeowner’s insurance should provide some peace of mind if you waive your home inspection contingency. You can also get a home appliance warranty as well. However, make sure you know what your insurance policies cover.
If you buy a home with cash, you may not be required to get homeowner’s insurance. However, it’s always a good idea to get disaster insurance just in case the worst happens.
Personally, I’m going to continue to waive the home inspection contingency for houses I really want. Before making an offer, I will visit the house multiple times with multiple people for hours. We will have a checklist of all the things to look out for before putting in an offer.
As someone who has done multiple remodels down to the studs, I know what to look for. I’ve seen all the shortcuts subcontractors have done and understand the range of quality of materials.
Everything is fixable, for a price. But safety is paramount. The biggest safety hazards are faulty wiring, weakened structural support, and a crumbling foundation. Make sure you thoroughly inspect these parts of the house before putting in an offer.